DC Tax Reform Package Starts Taking Effect

In July, the DC Council approved a major tax reform that cuts income and business taxes, expands the low-income tax credit, and applies sales tax to items exempt by historical accident, all based on the recommendations of a blue-ribbon commission. Effective today, consumers must pay the 5.75 percent sales tax on the following transactions:

  • Bottled water delivery
  • Storage rentals and leases, including self-storage
  • Carpet and upholstery cleaning
  • Health club and tanning services, including gym and fitness memberships
  • Car washes
  • Bowling alleys and billiard parlors

Ending the health club loophole proved the most controversial, with local gym Vida Fitness and a number of yoga studios launching a campaign to preserve their tax break that talked a lot about obesity and fitness and didn’t mention the income and business tax cuts that were part of the package’s tradeoff. (Vida itself will see a tax cut.)

Our map below, showing the 24 states that apply sales tax to fitness memberships and services, illustrates how there’s no discernible relationship between sales tax on gym memberships and obesity rates. On one hand, a lot of people have memberships and don’t go, and on the other, a lot of people exercise in ways that don’t involve high-priced membership payments.

Fun fact: if you compare the map with the United Health Foundation's 2014 America's Health Rankings report, only two of the top 10 healthiest states, Massachusetts (#5) and Colorado (#6), exclude gyms and fitness club memberships from their sales tax bases.

Despite winning mayoral candidate David Catania (I) to Vida’s cause, a broad coalition supported the tax reform package, and the DC Council approved it overwhelmingly. The rest of the package, which takes effect in 2015:

  • Middle-income taxpayers (those between $40,000 and $350,000) will see their tax rate drop from 8.5 percent to 7 percent next year, then 6.5 percent the year after that.
  • Those earning up to $1 million will see their tax rate drop from 8.95 percent to 8.75 percent.
  • All taxpayers will see more generous standard deductions and personal exemptions, as they will be increased to match federal levels.
  • Childless low-income workers will see a larger Earned Income Tax Credit (EITC), from 40 percent of the federal credit to 100 percent of the federal credit.
  • The District’s hefty business tax will drop from the current 9.975 percent to 9.4 percent (2015), 9 percent (2016-17), 8.5 percent (2018), and then to 8.25 percent (2019), and the District will adopt single sales factor apportionment.
  • The estate tax threshold will be recoupled to federal law.

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